In the first part of the article Brenner describes the nature of the Eastern bloc's economic system, the failure of the market reforms of the 1970s, the exacerbation of the Eastern bloc's productivity crisis via the arms race with the United States, and the difficulties of adapting a command economy to the production of consumer goods.

Today we are witnessing two very different sorts of crises, even if their historical development must, finally, be treated together. In the East; there is occurring a revolutionary crisis of the social system itself, which is in a state of disintegration and transformation into something else, most likely capitalism. In the West, the crisis of profitability of the last two decades has threatened the well-being of many of the capitalist system's constituent firms, although not the system itself.

In first exploring the origins and development, of the crisis in the East, we can subsequently better analyze how the two regions' respective crises interpenetrate, and, specifically, how the crisis-torn but still dynamic Western capitalist system will affect the emergent, quite feeble capitalism of the East.

The Bureaucratic System

The crisis in the East originates in the bureaucratic social system's inability either to provide liberty and democracy or, most especially, to deliver the goods. Most observers in the West and ruling groups in the East blame the system’s problems reliance on planning—as opposed to the market—believing that planning per se cannot work except in the most ineffective manner.

But these observers fall to see that the effectiveness of either plan or market can only be assessed in relation to the system of social relations in which each functions. The failure of planning under the bureaucratic system must be understood in terms of its system of social relationships.

Most importantly, the bureaucracy has constituted and reproduced itself as a ruling class by virtue of its ability to take a surplus directly by force from the collectivity of the direct producers, the working class. The bureaucracy takes a surplus by, first, directly and coercively organizing the division of labor, allocating inputs (especially inputs of labor power) to and outputs from each individual branch and firm; and, secondly, by coercively insuring that the workers collectively produce a surplus over and above their own cost of reproduction, the wage bill.

The bureaucracy must depend directly on coercion because, unlike capitalists, it cannot fully separate the workers from their means of production and subsistence. The bureaucracy's goal as a whole is obviously to maximize the total social surplus; the greater the social surplus available to it, the more easily it can achieve any particular aim(s) it might have. In order to maximize the total social surplus, the bureaucracy finds it in its own interest—has little choice but—to hire every worker it can, because every additional worker hired increases the social surplus (so long as that worker can individually produce a surplus product over and above his/her wage).

Consequently, the bureaucratic economic system has developed largely by extension—increasing its surplus by bringing in new workers and furnishing them with machines—rather than intensively—transforming the means of production available to each worker. Hence the working class as a whole constitutes the bureaucracy's greatest productive resource, while unemployed workers represent a waste of resources.

The ramifications are literally epoch-making. While workers have little control over their means of production and subsistence, they also have had secure employment. The bureaucracy cannot, as a rule, find it in its own interest to lay people off or fire them. The bureaucracy cannot therefore successfully use the workers' dependence upon employment, as can capital, to render them economically dependent upon the bureaucracy.

On the contrary, the bureaucracy must seek strictly to control labor mobility so that workers do not capitalize on the bureaucracy's insatiable demand to have their wages bid up by competing firms. Because workers are thus essentially merged with their means of production and subsistence, the bureaucracy finds it difficult to subject them to managerial control. Instead, the bureaucracy must squeeze out its surplus by forcing it from the workers, ultimately through its total control of the armed forces and the police. It is no accident that KGB agents populate every Soviet factory.

Hence labor power is not a commodity in the bureaucratic system. Even when—say, in periods of reform—firms are allowed to put on the market part of their output, they are not strictly dependent on purchases from the market for their inputs, nor dependent for their reproduction on sales on the market of their outputs. For they are not subject to the requirement of maximizing profits, nor are they allowed to go out of business.

Unlike under capitalism, then, labor power under the bureaucratic system does not flow among competing firms able to command labor in accord with their relative profitability and consequent ability to offer a wage (determined by their ability to minimize their costs in relationship to the price of their output).

Because the bureaucratic ruling class must get its surplus directly by force, the necessary condition for its rule is substantial exclusion of the working class from citizenship, a place in the state. Bureaucratic parliamentary democracy is thus a contradiction in terms.

It is thus the particular form of antagonism of the working class to the bureaucracy—in the work place and vis a vis the state—that constitutes the central barrier for the system in securing efficient allocation and increasing productivity. Because they control neither their output (surplus) nor their means of production, working people have no incentive either to improve their labor or to provide the information on their own local production that the planners need to plan and coordinate.

On the other hand, because the working class is in a sense merged with the means of production, the bureaucrats and managers find it especially difficult to seize control over the labor process so as, on their own initiative, to transform the productive forces.

Bureaucracy's Economic Rationality

It is with reference to this bureaucratic structure of social relations—and the opportunities and limits it sets—that individuals and classes determine the most reasonable way to maintain or improve their situation. Given their positions within the structure, most workers as well as many bureaucrats and managers find it reasonable to adopt patterns of economic activity that work against the system's efforts to coordinate and develop the productive forces. Why is this?

First of all, unlike capitalists, managers of firms lack any incentive to bring in new techniques or even to produce in response to demand. They cannot directly appropriate their firm’s profits and use these profits for investment or consumption; nor do they go out of business if their rate of profit and thus their rate of investment is low or nonexistent.

Unlike capitalists, these managers are neither under pressure to adopt cost-cutting innovations nor obliged to move from line to line so as to produce goods whose price has been driven up by demand. The bureaucratic system is thus put at enormous disadvantage against capitalism with respect to both developing the productive forces—i.e. improving productivity, efficiency—and effectively allocating resources.

Instead of maximizing the rate of profit, individual managers aim to appropriate the greatest amount of machinery, materials, and labor that they can so as to maximize their potential output. At the same time, the managers have every interest in concealing from the central planning apparatus their available inputs—the actual productive capacity of their firm.

By maximizing their available resources—their productive capacity—while conveying to the apparatus the lowest possible estimate of that capacity, the managers’ position themselves to best meet the quotas set by the apparatus with its “plan.” Meeting the demands of the apparatus' plan is the best way for managers to receive rewards and promotions.

The second reason why managers within the bureaucratic system adopt such practices involves the workers themselves. Unlike managers under capitalism, managers within the bureaucratic system lack the best mechanism yet invented to discipline labor within the labor process in a class society—the threat of firing.

Because their goal is to maximize firms’ potential output, managers within the bureaucratic system have a clear incentive to maintain any worker who is producing even the smallest surplus above the cost of his or her wage. Furthermore, because (as we shall see) the central bureaucracy is so reluctant to let even the most inefficient, loss-producing firm go out of business—providing additional subsidies to “unprofitable” firms rather than letting that happen—it is often in the managers’ interest to maintain or hire additional workers for their firms, even if these workers fail to produce more than they cost.

In this situation, workers know they need not worry about losing their jobs for lack of effort or poor performance. Moreover, it is often in the managers' interests to maximize wages and other benefits to workers in the interest of coaxing cooperation and securing stability.

In this context, the apparatus has no way of discovering actual resources at firms' disposal, since it is dependent for such information on firms' managers and workers, who have no interest in providing it Therefore, the apparatus cannot determine how efficient firms really are. Knowing firms’ output, without knowing their input, obviously tells one nothing about how well they are performing.

Because, more generally, the apparatus has no “objective” criteria to rely on in order to assess each unit’s efficiency—it cannot, as can capitalist owners, evaluate managers on the basis of the bottom line—it is obliged to forge direct personal relationships to secure performance. As a result, “corruption”—in which apparatchiks reward/promote their followers in the state administration and in the firms in order to get things done—becomes the indispensable grease making the wheels of the system turn.

This does not rule out the use of terror against managers and workers to improve performance; the latter is made possible through a system of industrial spying and punishments for nonperformance. But, as serf lords and slaveholders discovered, this is at best a decent way to extract absolute surplus—i.e. more output through more input. It is a hopeless means to secure the technical innovation required for greater efficiency—i.e. more output with the same input.

The upshot is that the bureaucratic “economic” system must run, at every level, in an essentially “political” manner. But despite its charge to operate modern industry, its political functioning looks more like an old regime society—based on a mix of coercion and corruption—than it resembles advanced capitalism.

Economic Functioning of the System

The bureaucratic system's aggregate economic patterns—its laws of motion, so to speak—follow from these patterns of behavior that its individuals and classes are obliged to adopt. It is incapable, for example, of planning in the strict sense—not because planning in itself is impossible, but because the apparatus has no way of eliciting the indispensable cooperation of the units of the system—its managers and workers—needed to secure maximum information and efficiency.

In particular, the apparatus has no way to prevent its firms from hoarding labor, machinery, and materials in order to maximize potential outputs, irrespective of demand. The system thus lurches forward through the production of massive gluts and the simultaneous appearance of equally massive shortages. From here, the apparatus attempts, in trial and error fashion, to make adjustments by forcing the requisite reallocations.

Meanwhile, the bureaucracy has a very difficult time eliciting innovation, since firms are under no competitive pressure to cut costs. The productive forces are therefore transformed very slowly, with each unit tending to experience declining returns. In the long term, this results in ever slower growth. A schematic outline of the system's historical development makes this trajectory clear.

Historical Evolution of the System

In the Soviet Union, the bureaucracy consolidated its power from the mid-1920s to the mid-1930s by establishing monopoly control of the state and state monopoly control of the economy. Put simply, the economy was hypercentralized through the state, so that social production and the surplus could be brought under the control of the bureaucracy.

Conformity to the requirements of bureaucratic control is thus the only way to understand the collectivization of agriculture on enormous state farms, which crippled Soviet agriculture for a whole epoch. Similarly, the state's Initial five year plans included among their goals bringing the working class under terrorist discipline, in reaction to workers’ growing alienation and consequent decreasing effort and care in production.

During their initial phase of development—so-called socialist primitive accumulation—the bureaucratic economies were able to achieve both improved productivity and more effective allocation. They increased workers' output per input simply by compelling relatively unproductive rural workers to go to the towns, where they were provided with better machinery, They improved allocation by setting as their goal the production of given quantities of a certain very limited number of final goods—especially arms, key raw materials and semi-finished goods like iron, coal, steel, and basic machinery. The fewer the tasks the command economy sets for itself, the more easily it can confront its problem with planning.

But once the transfer of the labor force from agriculture to industry had essentially been completed, the gains that could be had from increasing the equipment at the disposal of each worker were exhausted. Henceforth the bureaucratic economies had to depend on their constituent units to transform their technique; for all the reasons given earlier, that process occurred at best very haltingly.

At the same time, the bureaucratic regimes became increasingly obliged to diversify their economies in response to their populations’ pent-up demand for consumer goods. But in doing so, they ran up against their economies’ tremendous built-in barriers to planning—let alone the sophisticated planning required to respond to continually changing consumer demands.

The bureaucratic economies have been essentially stalled at the transition from extensive to intensive accumulation ... with the only ways out being a turn to capitalism, or to democratically planned socialism.

Bureaucratic Economies & World Capital

Nonetheless declining productivity cannot itself account for the explosive recent developments in the East While the point of departure for any analysis of the bureaucratic systems must be their internal contradictions, their growing crises over the last two decades must be understood within the context of their relationships to the world capitalist system.

Operating in a world of states where military and political competitiveness is ultimately dependent upon economic productivity, the bureaucratic systems’ inability to increase productivity as quickly as the capitalist states placed them at a disadvantage for decades. By devoting an increasing proportion of their GNP to wasteful military spending in order to keep up, these regimes only exacerbated their underlying problem of productivity.

Under the pressure of the U.S. military build-up over the last decade, the bureaucratic economies had to run ever faster just to stay in place politically and militarily, even as their productivity continued to slump. Moreover, as these regimes' populations gained greater knowledge of Western life and access to Western goods—due to a relaxation on both travel and the flow of information—they experienced these disparities more acutely and began demanding change more vociferously.

From Crisis to Market to Crisis

The immediate origins of the East’s current crisis lies in the failure of the “market reforms” of the 1970s and early 1980s, which were intended to quell those demands. Several of the bureaucratic states, notably Hungary and to some extent Poland, tried to remedy their economic problems by allowing individual firms a greater degree of autonomy from central control

Specifically, they allowed individual units to make their own investment decisions, to buy and sell their output on the market, and to contract loans freely. At the same time, they began opening the door to foreign trade and contracting massive loans from Western banks. But while they hoped that “the market” could be used to solve their problems, the result was unmitigated disaster, demonstrating the impossibility of a market socialism poised between capitalism and socialism.

Not completely reconciled to ceding direct control over their economies—upon which their domination rested—the nomenklaturas in Hungary and Poland did not introduce reforms that represented a move to capitalism. Had these bureaucracies allowed firms to live or die in competition on the market—competing, as capitalists did, for labor power, means of production, and finance—they would have lost control over the economies. Allocating resources according to profitability rather than the plan would have left profits in the hands of those capitalists who made the best investments. Bureaucrats in the East would have been reduced to the size of their Western counterparts: capable of intervening in their economies, but only so long as they did so in accord with the needs of profitability. They would, in other words, have become hostage to the capitalists, the new ruling class.

Even as they implemented their reforms, then, the bureaucracies in both Hungary and Poland retained direct control of important industries. They also continued to set prices for certain goods, while levying taxes and granting certain subsidies.

Perhaps most importantly, the bureaucracies made it clear that they would intervene to prevent firms from going out of business. Hence while they both gained access to new markets for credit and greater freedom to act in their own interests, firms within the bureaucratic system suffered none of the constraints of interfirm capitalist competition. As a rule, therefore, the reforms both allowed each firm to amass—much faster than before—resources in labor, raw materials, and finance, and, simultaneously, to invest at higher rates than previously. Not surprisingly, the old forms of crisis reappeared, but in a much accentuated form. The simultaneous appearance of enormous gluts and shortages threatened to bring the economy to a halt.

To make matters much worse, the authorities combined their internal “turn to the market” with radical increases in trade and secure loans from the West But since the reforms did not result in these economies' raising their efficiency, they could not increase their exports enough to pay for their increased imports, let alone enough to cover the interest charges on their loans. The burden of debt contracted during the reforms remains today a central bather to the growth prospects of Poland and Hungary, whatever the social system that is consolidated in these places.

Revolutionary Process in Eastern Europe

By the late 1980s, the economies of Poland and Hungary were in unprecedented crisis. Poland’s economic difficulties had already become exceedingly intense by the time of the great working class rising, led by Solidarity, of 1980-1981. These difficulties had been massively compounded by the government's subsequent inability, despite the defeat of Solidarity at the time of the coup d'etat of December 1981, to break the stubborn resistance of the working class.

As the decade progressed, certain important elements in the ruling circles both of Poland and Hungary appear to have taken a momentous, hitherto unprecedented decision: relinquishing hope that the bureaucratic economies could be reformed, they committed themselves to attempting a real transition to capitalist private property. Their goal was a revolution to capitalism from above, which they could control and hopefully benefit from.

But at least in Poland, the bureaucracy could not carry through a revolution purely from above, because the working class still retained the power to block any far-reaching transformation so long as this was led by the old bureaucratic rulers within the old dictatorial political framework.

To break this deadlock, Poland’s Communist Party took the historic and unexpected step of relinquishing its monopoly of government. Forming a coalition government with Solidarity following semi-free elections in 1989, it developed a program—an expression of the shared perspectives of significant sections of both the Communist and the old Solidarity leadership—with a goal of immediately establishing capitalist property.

Hence the ironic consequence of Solidarity's triumph over the bureaucracy, made possible by the unbreakable will of the Polish working class, was a new era of transition to capitalism. Over a period of only months, the world-historical question of the end of Communist rule and of the restoration of capitalism in an Eastern bloc country had been suddenly and unequivocally posed for the first time.

Ultimately, however, it was Mikhail Gorbachev’s acquiescence to these developments—and especially his refusal to intervene militarily—which opened the way to the titanic revolts in Eastern Europe.

The second part of the essay will explore the dynamics of the collapse of the bureaucratic system throughout Eastern Europe in 1989 and 1990, and Brenner's view regarding probable outcomes.